Tests for Forecast Encompassing

David Harvey, Stephen Leybourne () and Paul Newbold

Journal of Business & Economic Statistics, 1998, vol. 16, issue 2, 254-59

Abstract: The authors consider the situation in which two forecasts of the same variable are available. The possibility exists of forming a combined forecast as a weighted average of the individual ones and estimation the weights that should be optimally attached to each forecast. If the entire weight should optimally be associated with one forecast, that forecast is said to encompass the other. A natural test for forecast encompassing is based on least squares regression. The authors find, however, that the null distribution of this test statistic is not robust to nonnormality in the forecast errors. They discuss several alternative tests that are robust.

Date: 1998
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